Hunt scraps plans for 99pc mortgages after backlash from banks
‘As soon as you get to 99pc and house prices fall by 1pc, customers don’t have that economic interest’
JEREMY HUNT has scrapped plans for a scheme that would enable first-time buyers to get on the housing ladder with a 1pc deposit, just days after it emerged that the Treasury was considering the move.
Treasury insiders said the Chancellor had abandoned the taxpayer-backed scheme ahead of the Budget next week following a backlash from lenders that warned the plans risked a surge in defaults among borrowers.
Banks have said they would be forced to charge higher interest rates on 99pc loans because they would be putting up more cash to support the loan, while borrowers would probably be higher risk. Under the plans, first-time buyers would have been able to purchase a home with a deposit of less than £2,000, with a portion of their mortgage loan underwritten by the Government.
A Treasury insider said: “It’s off the table. It was one idea put forward by officials out of maybe 30. Headroom has drastically reduced since then, so we need to refocus the Budget.”
A senior banking source added: “It was just a headline grabber. Most first-time buyers won’t be able to afford it anyway.”
Mike Regnier, the Santander UK chief executive, said in January that mortgages for buyers with only a 1pc deposit could drive up risks for banks because borrowers would have less incentive to keep up with payments.
Mr Regnier said: “The customer has a proper interest in making sure they keep the repayments up [at 95pc] because they have an economic interest.
“As soon as you get to 99pc and house prices fall by 1pc, customers don’t have that economic interest any more and the rules of the game change quite considerably.”
TSB also said that a minimum 5pc deposit was an “important” protection. A spokesman said last month: “Like most lenders, we currently have a 95pc LTV limit and the deposit is an important element of protection for both customers and banks.”
Lucian Cook, director of residential research at Savills estate agents, warned that purchasing a home with a 99pc mortgage would be vastly more expensive for first-time buyers.
Purchasing a typical first-time buyer property in the UK with a 99pc mortgage would cost £4,400 per year more than if a first-time buyer purchased using a typical loan, according to the estate agent.
This means a first-time buyer purchasing via the government scheme would be paying £16,243 per year on their mortgage bill, 38pc more than if they had used a normal loan.
The difference is because they would be paying higher rates of interest on larger amounts of debt, Mr Cook said.
In the UK, first-time buyers typically take out mortgages that cover 77pc of their house price. On top of this, Mr Cook estimated that the rate on a 99pc mortgage could be around 0.5 percentage points higher than a typical loan. In London, where high house prices in proportion to earnings mean first-time buyers normally purchase with 69pc mortgages, the extra cost would be even bigger.
Purchasing with a 99pc mortgage would cost a first-time buyer 53pc more than if they bought using a typical loan, Mr Cook said. This would cost them an extra £868 per month, and would bring their total annual mortgage bill to more than £30,000.
A HM Treasury spokesman said: “We aren’t in a position to speculate about Budget measures. The existing scheme, providing a 95pc loan-to-value mortgage was introduced in April 2021, has so far enabled over 39,000 households to buy a home – over 86pc of which are first-time buyers.”